Visualizing The Problem of Allocation

We can visualize the efficient allocation of resources with a graph like this one. The labor used on the infertile north field is measured on the horizontal axis and the total output from both fields in shown on the vertical axis. (We are assuming, of course, that all labor not used on the North field is used on the South field). The dark green curve shows how total output changes as we shift labor from the north field to the south field. Thus, the top of the curve is the interesting spot -- that's where we get the most output. In this example, that's the efficient allocation of resources between the two fields.

Figure 4: Maximum Production

It's easy to see that we should put some labor to work on the north field -- but not too much. The vertical orange line shows that the maximum output -- the top of the dark green curve -- comes when about 300 labor days are allocated to the north field and the rest, 700 labor days, to the south field. And that's exactly right.

It's pretty easy to see where the maximum is in this simple example. But in a more realistic example, in which there could be many more than just two dimensions, it's harder to visualize. We need a rule that we can apply in more complex, realistic examples, a rule that will tell us if we have or don't have an efficient allocation of resources.

That's where the economist's "marginal approach" comes in. The objective is to get to the top of the hill. You could call "the marginal approach" the "bug's-eye view." Think of yourself as a bug climbing up that production hill in the picture. How will you know when you are at the top?